Sheridan, a leftwing politician and a former member of the Scottish Parliament, is accused of lying during a successful defamation case he brought against the News of the World in 2006. Coulson edited the paper at the time.

"Mr Coulson's evidence to the trial of Mr Sheridan related to his former employment with News International, and is therefore appropriate they should pay his legal bill," O'Donnell wrote.

He added the arrangement was approved in advance by the Cabinet Office.

"[It was made] on the same basis as would occur if a former minister or civil servant were to be involved in legal proceedings as a result of their government employment, when the government would normally pay", O'Donnell said.

Watson wrote to the cabinet secretary last week claiming NI's decision to foot Coulson's bill amounted to a gift and demanded to know whether it had been registered in accordance with government guidelines.

The code of conduct for special advisers says that they should not receive benefits "which others might reasonably see as compromising their judgment or integrity".

"I am sure many reasonable minded people would see the payment as compromising Mr Coulson," Watson wrote.

Watson said today: "There is an increasing desperation to suppress the full truth of this media scandal. At the very least we should be told how much News International is donating to Andy Coulson for his high-level legal advice."

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